Talking Treasury

There has been a secular change in cap rates for malls. With about 80 percent of the best assets in public hands, and about 60 percent of all regional malls now owned by public companies, cap rates will remain low due to the rarity of these assets. Therefore, we do not expect regional mall cap rates to respond quickly to interest rate changes. We also expect that institutional joint venture partners will continue to invest in malls because they recognize the long-term favorable characteristics of investments in that property type, particularly when they can make these investments along side public REITs.

Greg Maloney, president and CEO of Jones Lang LaSalle:

There is less quality product on the market today than there was in the past 24 to 36 months. We have seen more than 40 percent turnover of regional malls over the past four years, many having been bought by REITS and will not likely return to the market in the short term. Cap rates usually lag behind interest rates but not far. As the product becomes more challenged and yields continue to be lower, many investors will be hesitant to buy, thus causing a slowdown in the capital markets activities. As a result, with not as much retail product (and what is left being poorer quality), investors will gravitate to the other real estate sectors, where they believe the best opportunity for growth exists. We've seen this happen in the past and I believe history will repeat itself.

REITs will slow their acquisitions over the next 18 to 24 months as interest rates rise. They will then be more focused on earnings growth through redevelopment of their portfolios as well as through improved management and operating fundamentals. Upward movement in cap rates will lag behind interest rate increases — and changing lender underwriting — for a short period before we see cap rates increase. A noteworthy point is that buyer demand remains so strong that I believe it will continue for a considerable period, maybe two to three years, notwithstanding potential interest rate increases.

Ken Wong, president, Westfield Group:

The broad expectation for a rise in rates during the next 24 months will likely cool the pace and pricing of acquisitions in all sectors. We believe that our joint venture partners will continue to see retail as a preferred sector because of its strong underlying fundamentals.